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Central Asia news

Kyrgyzstan: New Agreement on Kumtor Divides Kyrgyz Elites

30.04.2009 12:51 msk

Alisher Khamidov

Business Kyrgyzstan

Kyrgyz government and a Canadian gold mining investor have reached a deal over Kumtor, the largest gold mine in Kyrgyzstan. While the settlement of this long-running dispute is expected to improve the country’s sagging investment scene, divisions among influential Kyrgyz elites may become serious roadblocks for the gold project.

Under the terms of the agreement, signed by Toronto-based Centerra Gold and the Kyrgyz government on April 24, the Kyrgyz state’s shares in Kumtor gold production will increase to 33 percent from the current 15.6 percent. In return, the Kumtor Gold Company, the subsidiary of Centerra that develops the Kumtor mine, will be levied a 14 percent tax rate instead of paying six separate duties which included withholding taxes of up to 30 percent. The Kumtor Gold Company is also expected to pay about $22.4 million in back taxes.

The Kumtor gold deposit is located in the Issyk Kul region, about 350 kilometers southeast of Bishkek. It is the largest gold mine in the country with estimated 731 tons gold reserves. In 2008 gold production at Kumtor was estimated at 17.3 tons. The Kyrgyz economy annually receives around $30 mln, or 10 percent of its GDP, in taxes from Kumtor Gold Company.

Kumtor began as a joint Kyrgyz government venture with the Canada-based Cameco Corporation in 1992. Under the initial agreement, the Kyrgyz government held close to 60 percent of shares in gold production at Kumtor. A complicated restructuring process in 2004 created Centerra Gold and shares of the Kyrgyz government fell to less than 16 percent.

The Kyrgyz government and Centerra Gold reached an agreement in November 2006 that increased the Kyrgyz state shares in Kumtor from 16 percent to 29 percent. However, the Kyrgyz parliament, at the time dominated by Bakiyev opponents, refused to ratify the agreement.

The ousting of the opposition forces from the parliament in December 2007 elections provided an opportunity for the Bakiyev administration to have the agreement with Centerra Gold ratified. However, in a change of mind, the Bakiyev administration sought more than 30 percent stake in the gold production. Throughout 2008, the Kyrgyz authorities made efforts to compel the company to sign a new agreement. In June 2008, a district court in Bishkek voided Kumtor Gold Company’s exploration license. The government used the court ruling as a pretext to suspend the company’s bank accounts and other liquid assets.

The Supreme Court reinstated the license after Centerra Gold threatened to take the matters to the International Court of Arbitration. According to Andrey Sazanov, the director of the Kumtor Gold Company, Centerra Gold’s shares fell from $15 to $4.5 percent in 2008 because of the Kyrgyz government action. Centerra Gold’s shares increased by 14 percent at the Toronto Stock Exchange trading after the signing of agreement on April 24.

Bakiyev’s administration is hailing the agreement, saying that it would bring additional revenues to the country’s sagging budget. However, the deal with Centerra Gold has divided the Kyrgyz government officials. A camp of “hawkish” government officials led by Kubanychbek Isabekov, an influential deputy speaker of the parliament, and Alexei Eliseev, the chairman of Kyrgyzaltyn board, a state gold company, is claiming that Kyrgyzstan should not settle for less than 50 percent ownership in the Kumtor project. Such officials are supporting punitive action against Centerra Gold as well as the legislation that would nationalize the Kumtor mine.

A second group of officials – led by Akylbek Japarov, Minister of Economic Development and Trade, and Almazbek Djakypov, president of Kyrgyzaltyn – have defended the agreement. Such officials have argued that because Kyrgyzstan lacks technical expertise, equipment and resources necessary to extract gold at high altitude locations such as Kumtor, Centerra Gold’s departure would be highly disadvantageous.

President Bakiyev has taken a middle ground between the “hawks” and the “doves" until recently. The settlement of the dispute indicates that Bakiyev has tilted toward the “dovish” officials and that the Kyrgyz legislature, dominated by pro-presidential party Ak Jol, is likely to endorse the deal in the coming weeks. However, the opposition against the deal from influential elites is unlikely to dissipate. For example, the legislation on nationalizing Kumtor is still being promoted by the Isabekov group in the Kyrgyz parliament. If adopted, the legislation will have serious ramifications for the foreign companies working in the mining industry.

Some Kyrgyz political observers say that the distribution of revenues resulting from the renegotiated settlement is likely to further intensify inter-elite competition. There are already allegations that the Kumtor deal will provide most benefits to President Bakiyev’s inner circle, including his family members.

Alisher Khamidov is a researcher at the School of Advanced International Studies at Johns Hopkins University. Washington, D.C.